McKee Foods Corporation History

Company Perspectives:

We take pride in working together to provide great-tasting snack foods of outstanding value to delight customers throughout all of North America.

Company History:

Family-owned and operated, McKee Foods Corporation is the David to such Goliaths as Nabisco Brands, Lance, and Interstate Bakeries. McKee Foods' threat to these and other food giants is the niche of snack cakes, the driving force behind the company's persistent growth in sales in the 1980s and 1990s. This growth was all the more remarkable in view of the company's comparatively low profile, lack of a full-scale national sales force, and cautious approach to expansion. The secret to McKee's success was its Little Debbie snack cake line, which dominated the market for snack cakes in the United States in the second half of the century, frequently with a greater than 50 percent market share. By comparison, McKee's closest competitor, Ralston-Purina's Continental Baking, generally posted less than a 20 percent market share. Nutty Bars, Figaroos, Oatmeal Creme Pies, Caravellas, Golden Cremes, Devil Cremes, Swiss Rolls--some 66 varieties in all graced the Little Debbie snack cake line in 1999. McKee Foods also marketed granola bars, granola cereals, and other bakery products under the Sunbelt label.

Company Origins

The company was born during the heart of the 1930s depression. A young North Carolina couple, O.D. and Ruth McKee, lost their savings after a bank failure and moved from their home in Hendersonville to Chattanooga, Tennessee, in 1933. O.D. found work as a bakery salesman, selling Virginia Dare Cakes from Becker's Bakery, a local establishment, for five cents each. By 1934 O.D. had purchased his own delivery truck. He then found out that Jack's Cookie Company, another Chattanooga bakery, was up for sale. O.D. cashed in his truck and he and Ruth became owners and operators of their first business. According to the company publication The Story Behind Little Debbie Snack Cakes, the two "were ideal business partners because her cautious, conservative nature was the perfect complement to his risk-taking, adventuresome spirit."

In 1935 the couple moved the business to a new location and began making soft cookies and cakes. A year later they handed the business to Ruth's father, Symon D. King, and returned to North Carolina to launch a new bakery. Located in Charlotte and named Jack's Cookie Company like its predecessor, the business was highly successful. In 1946, O.D., who "always had a gift for innovation and automation," built a new, state-of-the-art plant. During this period he also invented a soft oatmeal creme pie, "the company's oldest continuous product," according to Milling and Baking News.

The McKees sold their Charlotte business in the early 1950s and considered retiring. They decided instead to return to Chattanooga to manage the original Jack's, now called King's Bakery and owned by Ruth's brother, Cecil King. In 1954 O.D. and Ruth purchased the company stock, and the foundation for the McKee Baking Company was born. As he had previously, O.D. served as salesman, inventor, and production manager while Ruth operated as purchaser, personnel manager, and office manager. In 1957, when they outgrew the Chattanooga bakery, the operation moved to nearby Collegedale. It was at this location that the company established its headquarters and grew into a major private corporation. The original Collegedale plant was expanded more than a dozen times before a sister plant was added. In 1982 the McKee family launched a third plant in Gentry, Arkansas; a fourth followed eight years later in Stuarts Draft, Virginia. By this time Ruth had passed away and O.D. had transferred management to his sons, Ellsworth and Jack, while retaining his chairmanship.

Introduction of Little Debbies in 1960

In 1960 the company made history in two ways. First, after leading the industry in mass production of small snack cakes, it conceived the "family" pack of 12 individually wrapped cakes sold as one multipack unit. Second, it began affixing the Little Debbie brand, named after Ellsworth's daughter Debra, to its products. Both Little Debbie and the family pack remain the company's most significant generators of sales. A proliferation of snack cake varieties since that time--including the introduction of the Sunbelt line in 1981--has been fueled by the momentum of these two landmark events.

By 1982 McKee Baking, with $130 million in sales, ranked 22nd in the industry, behind such billion-dollar giants as Continental and Interstate. Sales at the time were concentrated principally in the Midwest, Southwest, and West. By 1987 the company was able to boast annual sales growth of ten to 15 percent since the advent of Little Debbie, a product line that had now expanded to 32 varieties available in 41 states. McKee succeeded in conquering Continental's Hostess, Interstate's Dolly Madison, and other major national brands through its low pricing. According to Forbes writer William Stern, the feisty competitor sells its products through supermarkets for 50 percent to 70 percent less than other comparable items. More surprisingly, the company's net margins after such heavy undercutting are approximately six percent, while the average for the industry is 5.5 percent. "What's to stop McKee's giant competitors from matching its low prices?" queries Stern. "Common sense. ... They are giant corporations with giant overhead, while McKee is a family business. And, even with lower prices, it would take them years to get the economies of scale McKee gets from its overwhelming market share." McKee maintains its low overhead by employing an independent distribution system and by expanding production only to keep pace with demand. Another advantage it has over the competition is the long shelf life of its naturally preserved products--some three to four times as long as that of Hostess Twinkies.

After 1980 McKee enhanced its market share by selling to convenience stores as well as supermarkets and by periodically rolling out national television campaigns, the most memorable of which was launched in 1985 featuring impersonator Rich Little. New products, including Little Debbie Fancy Cakes and the Little Debbie Snack Favorite line, also served as powerful inducements to buyers, at least half of which were age 15 and under. The company changed its name in 1991 to McKee Foods Corporation. Under chief executive officer Ellsworth McKee, the Tennessee bakery preserved its highly private identity and strong family management (many third-generation McKees hold high positions within the company). Although investment houses and bakery competitors, especially Continental, have hoped for the family to sell, Ellsworth has responded: "There's no way we can be forced to." With its highly profitable status as the largest independently owned company of its kind in the country, and with consumer demand and snack cake share still rising, there would be little sense in doing so.

Continued Market Leader in the 1990s

The recession in the early 1990s provided fuel for the company's growth. With their lower prices, Little Debbie and Sunbelt brands attracted new consumers looking to shave expenses. To keep up with the company's steady growth, McKee Foods opened two new bakeries, one in Gentry, Arkansas, and the other in Stuarts Draft, Virginia. In keeping with the company's conservative approach to expansion, the new plants provided just enough capacity to keep up with existing demand. McKee produced baked goods only to fill orders. By 1999 the bakery in Gentry was employing 1,265 people, and the one in Stuarts Draft employed 925 people.

In the mid-1990s Ellsworth McKee handed the reins to his brother Jack, who took over as president and chief executive officer. Ellsworth continued to provide input into running the business from his position as chair of the board.

McKee Foods continued to rely on brand recognition and customer loyalty to generate sales, rather than national advertising campaigns and a national sales force dedicated to drumming up orders and garnering shelf space in grocery and convenience stores. Sales rose from $525 million in 1991 to approximately $825 million in 1997. Although sales were up only a modest 0.7 percent in 1998, to $831 million, the company still dominated the snack cake market segment.

The company's Sunbelt brand benefited from the tremendous growth in the granola bar market in the 1990s. By 1998 the Sunbelt Granola Bar line accounted for $33.5 million in annual revenues. Americans were spending nearly a billion dollars a year on granola bars, however, and Sunbelt held only a fraction of that market, behind Kellogg's Nutri-Grain brand, the clear leader; Quaker Oats' Chewy granola bar line; and Kellogg's Rice Krispies Treats. McKee was used to battling the big-name brands, and the company moved to capture a greater piece of the granola bar category in the late 1990s. McKee began a national marketing campaign in 1998 to promote its granola bar line in general and its new S'mores variety in particular. With print advertising in People magazine and television ads on game shows, talk shows, and home shows, the company hoped to reach its target audience of 25- to 49-year-old female heads of households with children aged six to 17. Employing a strategy that worked well with its Little Debbie brand, the company also challenged its competitors with lower prices, suggesting retail prices ranging from $1.49 to $2.49 per carton.

Despite competition from baking giants Nabisco and Interstate Bakeries, McKee maintained its lead in its chosen snack cake niche and pursued modest expansion in the granola segment. Still family-owned and family-operated as of the late 1990s, McKee had reached number 247 on Forbes' Private 500 list, and family members showed no sign of letting the company slip from their hands.

Principal Subsidiaries: Sovex Natural Foods.

Further Reading:

• "Family Clout Backs Philosophy of Independence in Era of Mergers," Milling & Baking News, November 11, 1988.
• "McKee Baking Sets July Start for Production at New Virginia Plant," Milling & Baking News, May 8, 1990.
• "McKee Plans 'Little Debbie' Plant in Virginia," Bakery Production, May 1987.
• "McKee's New Snack Plant Begins Production," Bakery Production, August 1990.
• Stern, William, "Mom and Dad Knew Every Name," Forbes, December 7, 1992.
  The Story Behind Little Debbie Snack Cakes, Collegedale, Tenn.: McKee Foods Corporation.
• Thompson, Stephanie, "McKee Eyes S'More Media for Sunbelt," Brandweek, October 19, 1998, p. 10.

Source: International Directory of Company Histories, Vol. 27. St. James Press, 1999.

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